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Review of the Fixed Narrowband Services Markets Draft Statement on the Proposed Markets, Market Power Determinations and Remedies

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Review of the Fixed Narrowband Services Markets Draft Statement on the Proposed Markets, Market Power Determinations and Remedies Review of the fixed narrowband services markets Draft statement on the proposed markets, market power determinations and remedies Redacted For Publication EMBARGOED COPY – for the European Commission and National Regulatory Authorities. Contains market sensitive information. Not for public release prior to publication by Ofcom at 0700 BST on 21 August 2013. Draft Statement Notified to the European 20 August 2013 Commission : Review of the fixed narrowband services markets Contents Section Page 1 Executive Summary 1 2 Background 7 3 Market overview and developments in the United Kingdom 19 4 Retail narrowband services in the Hull Area 29 5 Wholesale call origination 39 6 Wholesale fixed geographic call termination 143 7 Transit and conveyance services 183 8 Price regulation of wholesale call termination and origination markets: LRIC, common cost recovery, symmetry and APCCs 199 9 Cost modelling for the charge control on wholesale call termination and wholesale call origination 229 10 Interconnect circuits 237 11 Charge control specification 278 Annex Page 1 Proposals for SMP conditions excluding charge controls 295 2 Proposals for charge controls for call origination, call termination, interconnect circuits, and project management, policy and planning 334 3 Proposal for NTS retail uplift 359 4 [Draft] direction to provide interconnect circuit KPIs 369 5 Network and technology choice for the NCC 374 6 NCC model approach and design 404 7 CSMG report on NGN modules of NCC model 454 8 Network cost model outputs and crosschecks 455 9 Effective date for new rates 470 10 Guidance on the setting of fair and reasonable fixed termination rates 496 11 Sources of evidence 499 12 Equality impact assessment 513 13 Regulatory framework 518 14 Glossary 525 Review of the fixed narrowband services markets Section 1 1 Executive Summary Introduction 1.1 This statement sets out decisions designed to promote competition in the supply of telephone calls from fixed lines for the next three years (from 1 October 2013 to 30 September 2016), under the European Framework for Electronic Communications. These decisions are important in furthering the interests of citizens and consumers. 1.2 Despite the growth of mobile and online services, millions of us still make and receive telephone calls from fixed lines at home or at work. As a result, promoting effective competition between communications providers (CPs) that offer fixed line calls remains an important part of Ofcom’s work. 1.3 The services covered in this statement are “fixed narrowband telephony services”, including retail services, in particular voice telephone calls, and wholesale services such as call origination and call termination, offered between CPs.1 1.4 In this statement we present the conclusions of our review of the retail and wholesale markets for fixed narrowband telephony services in the United Kingdom. We explain how we are going to regulate these markets and the rules we are imposing on any company we have found to have significant market power (SMP). 1.5 These new rules will replace the existing rules and will take effect from the date of this statement, and, in the case of the charge controls, from 1 October 2013. 1.6 We have decided to impose controls on charges for wholesale call termination and wholesale call origination. We have concluded that wholesale call termination rates will be based on long run incremental costs (LRIC) and wholesale call origination rates on LRIC+2 with effect from 1 January 2014. This review 1.7 On 17 May 2012 we published a ’call for inputs’ (‘May 2012 CFI’), seeking views on the proposed scope of our review.3 We received 12 responses from industry stakeholders, including BT and other fixed and mobile CPs. 1.8 On 28 September 2012, we published a further consultation document: Narrowband Market Review – Consultation on possible approaches to cost modelling for the Network Charge Control for the period 2013-2016 (‘September 2012 consultation’). In that document, we sought views on how we might implement cost modelling for the purposes of setting charge controls for certain key markets in this review, should a 1 For a full list of markets considered see Section 2. 2 The “+” includes both the common costs attributable to wholesale call origination and those common costs that are no longer recovered from wholesale call termination. 3 Ofcom, Fixed Narrowband Market Review, Call For Inputs, 17 May 2012 - http://stakeholders.ofcom.org.uk/consultations/narrowband-market-review-call/ 1 Review of the fixed narrowband services markets charge control remedy be necessary.4 We received 13 responses from industry stakeholders, including BT and other fixed and mobile CPs. 1.9 On 5 February 2013, we published a further consultation: Review of the fixed narrowband services markets – Consultation on the proposed markets, market power determinations and remedies (‘February 2013 consultation’). In that document we set out our proposals on market definition, SMP and remedies to address our proposed SMP findings. We received 35 responses from industry stakeholders, including BT, other fixed and mobile CPs, industry associations, standards bodies and private individuals. Summary of conclusions 1.10 This document should be read in conjunction with our consultation documents in which our original analysis is set out in full. Our conclusions in this statement are drawn from that original analysis and careful consideration of the responses received to our consultations. 1.11 In this market review we conclude that: • The fixed voice retail calls markets in the United Kingdom excluding the Hull Area, remain effectively competitive and no company holds a position of SMP; • In the Hull Area, although KCOM’s market share remains high both in retail residential and in retail business fixed calls, we consider that ex post competition law is sufficient to address any competition concerns at the retail level. We are therefore removing all remaining ex ante regulation in the relevant markets at the retail level; • BT has SMP in the provision of wholesale call origination in the United Kingdom excluding the Hull Area, and: o we are imposing access and non-discrimination remedies; o a charge control is an appropriate remedy; 5 o we are removing BT’s obligation to offer carrier pre-selection (CPS) and indirect access (IA)6 where BT’s retail arm7 provides the retail access line;8 and o for calls to non-geographic numbers, we require that BT provides number translation service (NTS) call origination, until our separate review of these non-geographic calls services is completed and the resulting changes to the 4 Ofcom, Narrowband Market Review, Consultation on possible approaches to cost modelling for the network charge control for the period 2013-2016, 28 September 2012 - http://stakeholders.ofcom.org.uk/consultations/narrowband-market-review/ 5 CPS is the facility offered to customers that allows them to opt for certain defined classes of call to be carried by an operator selected in advance without having to dial a routing prefix or follow any other different procedure to invoke such routing. 6 IA is the facility offered to BT’s retail customers that allows them to access the services of any interconnected CP, but on a call-by-call basis by dialling a carrier selection code. 7 This includes the divisions of BT known as BT Retail and BT Global Services. 8 “Sunset” provisions for the current CPS and IA obligations on BT of 12 months will apply as a transition period to allow CPs to adapt to this change. This is explained in paragraphs 5.308 and 5.310 respectively. 2 Review of the fixed narrowband services markets regime have been implemented. BT’s charges for the retailing activities associated with these services will be capped at their current levels (in real terms) until then.9 10 • In the Hull Area, KCOM has SMP in the provision of wholesale call origination, so we are imposing a requirement to provide network access on fair and reasonable terms. We do not consider that a charge control is required. We are removing KCOM’s obligation to offer CPS and IA where KCOM’s retail arm provides the retail access line11; • Each CP that connects calls to its own customers has SMP in respect of the market for the supply of wholesale call termination to those numbers. For BT we are setting a range of remedies including a charge control based on the long-run incremental costs (LRIC) of wholesale call termination. For all other CPs, including KCOM, we are imposing a requirement to provide access on fair and reasonable terms and conditions, including charges; • For single transit, we consider that ex ante regulation is no longer appropriate on the basis that ex post competition law is sufficient to address any competition concerns that might arise. We are therefore removing all remaining ex ante SMP regulation in this market; • BT is required to provide interconnect circuits on reasonable request and charges for interconnect circuits will be charge-controlled; and • KCOM is required to provide interconnect circuits on reasonable request but no charge control will apply to such provision. 1.12 In setting charge controls for wholesale call origination and termination, we have estimated the forward-looking cost of providing wholesale services based on a Next Generation Network (NGN) model using the internet protocol (IP). 1.13 The charge controls for the provision of wholesale call termination will be based the LRIC of providing the service. We explain in more detail in Section 8 of this document, why we are capping FTRs at LRIC. This LRIC cap will be based on our NGN cost model and the LRIC cap will apply from 1 January 2014. 1.14 This approach will lead to FTRs falling from an average of 0.219ppm in 2012/13 (in 2012/13 prices) to 0.034ppm by 1 January 2014 (in 2012/13 prices).
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